“Flash Crash” Fallout: Focus Turns To ETFs

by on May 7, 2010

A day after the Dow posted its worst intraday decline on record–it fell nearly 1,000 points at one point on Thursday–exchanges and regulators are still trying to figure out exactly what happened. Reports of bizarre trading patterns during the sudden dip prompted speculation that technical glitches played a major role in accelerating the freefall. By the time markets bounced back to close down about 3% (after dropping as much as 9% during the session), several curious charts had begun circulating; several multi-billion dollar companies had momentarily become penny stocks during the day; share prices for stocks from Accenture to Windstream Corp. approached zero for a few terrifying moments (see Ten Interesting ETF Charts From Thursday’s Freefall).

On Friday morning, stock exchange operator Nasdaq OMX Group said that it would cancel trades with price deviations of more than 60% between 2:40 p.m. and 3:00 p.m. from their 2:40 p.m. levels. Similarly, the New York Stock Exchange (NYSE) announced that is would cancel trades on the all-electronic NYSE Arca platform that deviated more than 60% from the last print at 2:40 p.m. between 2:40 p.m. and 3:00 p.m.

While the initial reports focused on stocks that had plummeted during the day, it has now become apparent that several ETFs were affected as well, and in fact account for a significant portion of canceled trades from “Flash Crash Thursday.”

Index Universe is reporting that of the 281 securities included in Nasdaq’s list of securities that saw “unusual” trading activity on Thursday, 193, or about 69%, were ETFs or ETNs. From the NYSE’s list, 111 of the 173 securities on that list, of about 64%, were exchange-traded products (see a spreadsheet detailing the canceled trades, including a breakout between ETFs and non-ETFs).

The moves to cancel trades that occurred outside a certain bandwidth drew strong criticisms from Wall Street. “Traders were calling the move to reverse trades unprecedented, and were at a loss to explain exactly how exchanges reversing trades would be able to unwind the trades that were executed during the period of feverish selling,” writes the team of Matt Hougan, Dave Nadig, and Oliver Ludwig.

The full explanation for Thursday’s meltdown remains elusive, and it isn’t immediately clear why ETFs apparently played such a big role. Stay tuned for more developments on this story–there’s no doubt much more to come.

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Disclosure: No positions at time of writing.